Three letters that seem so simple: SRI – Socially Responsible Investment. But they describe nothing less than the developmental steps of the so-called sustainability revolution. Evolution might have a nicer ring to it, especially since the early days of CSR activities were characterized by a high degree of voluntary action, experimentation and very few standards. Unfortunately, companies have failed to act quickly enough and – with the exception of real estate investment certificates and GRI reporting standards – is marked by a high degree of one-off, local, company- or property-specific initiatives. However, this is soon to be ended by an almost revolutionary act: The EU action plan on sustainable finance, better known as the “Taxonomy” (Regulation (EU) 2020/852), will bring about a tectonic shift in the parameters for real estate investors and their investment companies. The most obvious and immediate impact of the new Taxonomy will undoubtedly be to create a tangle of red tape and new risk-based due diligence requirements, which is likely to lead to immediate grumbling and lobbying behind the scenes. On a deeper level, however, the Taxonomy represents nothing less than a paradigm shift for real estate companies as legislators strive to redirect capital flows towards more sustainable investments. Reading further, it quickly becomes clear that our “cosy little real estate world” is about to be shaken up because the latest capital market requirements are in reality a whirlwind that will sweep up all assets in its path.
A look at the catalogue of measures, e.g., Measure 1: the introduction of an EU classification system for sustainable activities; Measure 2: the standards and labels for environmentally friendly financial products (labels); and Measure 3: the promotion of investments in sustainable projects, reveals that real estate portfolio holders can no longer argue that they are on a long-term journey towards sustainability. In a nutshell, without documentation, implementation and reporting of the requirements described above, no capital! And, the frantic launch of “green” real estate funds is not a sustainable solution either.
The pressure on the real estate industry is mounting. We’ve been successful in resisting change in the past and have, as an industry, managed to go our own way, but those days are over. We can still point to a wide range of uncertainties. For example, real estate funds have so far been excluded from the EU Action Plan’s Ecolabel, and there is a lack of translation and benchmarks to define the product positioning required by the regulatory authorities (“Basic”, “ESG Strategy”, “Impact”). Furthermore, the ESG system for real estate portfolios has not yet been defined and is not (yet) the focus of the taxonomy, but is particularly relevant for institutional multi-asset investors, who want a practical tool that will help them reduce the CO2 footprints of their portfolios.
Anyone who has not yet got the message needs to adjust their mindset and embrace the new corporate paradigm: social responsibility and ROI are not mutually exclusive! Doing the right thing means broadening your horizons and recognising that SRI demands a three-pronged approach: being social, being responsible and investing sustainably. There’s far more to it than just “green financing!”
Professor Thomas Beyerle